Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first examine what you'd want to see from a perfect stock, and then decide whether Intel
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Intel.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||2.4%||Fail|
|1-Year Revenue Growth > 12%||24.2%||Pass|
|Margins||Gross Margin > 35%||66.1%||Pass|
|Net Margin > 15%||26.8%||Pass|
|Balance Sheet||Debt to Equity < 50%||4.3%||Pass|
|Current Ratio > 1.3||3.48||Pass|
|Opportunities||Return on Equity > 15%||25.6%||Pass|
|Valuation||Normalized P/E < 20||12.22||Pass|
|Dividends||Current Yield > 2%||3.4%||Pass|
|5-Year Dividend Growth > 10%||14.5%||Pass|
|Total Score||9 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With nine points out of 10, Intel comes as close to a perfect score as we've seen. Its sole blemish, though, exposes one of the only fears investors have about the semiconductor juggernaut.
Intel has long held a near-monopoly on the processors that run PCs. With primary rival Advanced Micro Devices
But the company isn't keeping up in the fast-growing, competitive tablet and smartphone market. With Microsoft
Moreover, just yesterday, Intel announced a recall of the chipsets for its Sandy Bridge processor, which combines graphics and CPU functions in one chip. That stands to be the most expensive recall in its history, and customers who use the chip, including Dell
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
Editor's note: This article has been updated to clarify the recall is for Sandy Bridge chipsets and not the processor itself.
Click here to add Intel to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Intel and Microsoft are Motley Fool Inside Value picks. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel and a diagonal call position on Microsoft. The Fool owns shares of Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.